Government Procurement in a mess … but is it just the tip of the iceberg?

December 12, 2013

A series of recent incidents from around the world (or at least, the English-speaking world) must lead anyone to ask ‘what is wrong with public sector procurement?’

Is it just a coincidence that major problems seem to be popping up on a regular basis (e.g, in recent weeks, Obamacare, Queensland outsourcing, UK justice contracts and now the abandonment of outsourcing defense procurement), or is there a pattern that would imply something more fundamental is wrong?

First, I think there is a pattern. And second, I am not sure that the problem is actually procurement (at least, not from a functional perspective), but it is rather a question of organizational competence to undertake specific types of procurement. And I suggest that problem is not unique to Government or public sector.

In organizations worldwide, the pattern of trade and trading relationships has altered extensively over recent years. The proportion of direct (input based) business has fallen substantially, to be replaced by a world of outcome or output based services and solutions. This has dramatic impact on the responsibilities of the parties and places strains on their abilities to interact over much longer time-frames.

As Dalip Raheja of The Mpower Group pointed out in a recent article, this demands different approaches to supplier selection and to on-going performance management – and relatively few organizations are especially good at doing that.

The reason that Procurement (as a function) comes in for justifiable criticism is that it appears not only to have failed to spot the need for a new approach, but has actually invested in systems and skills development that are making things worse. However, to be fair, who is ultimately responsible for defining required organizational capability – individual functions or senior management?

The point is that Procurement and senior management between them have often turned a demanding challenge in organizational capability into a crisis of competence. The focus on control, compliance and input cost savings has lulled everyone into a belief that acquisition management was in good hands. In reality, Procurement has maintained its narrow view of the acquisition process and the associated measurements of success. It is very rare for Procurement to have insight to, or responsibility for, the overall performance of the supply relationships they put in place – and that is the fault of management and policy makers, not the function.

It is now 10 years since IACCM started writing and presenting on this developing problem – the fact that Procurement measurement regularly leads to either the wrong supplier being selected, or drives the wrong supplier behavior. Narrow selection criteria, unbalanced risk allocations and the absence of competent post-award management add up to an environment that is unsuited to achieving good outputs or outcomes, Yet throughout this period, not only have the measurements and skills remained largely untouched, but Procurement has often spent millions of dollars, pounds or whatever currency in reinforcing capabilities relevant to the past, Many consultants, analysts and professional associations have continued their drumbeat around driving out cost rather than tackling the real question, which is how to generate value from trading relationships. Even now, many of them appear reluctant to acknowledge just how deficient their advice or training has been.

This is not specifically a public sector issue. Similar failures are endemic to a world in which acquisition strategies and capabilities simply have not kept pace with business models. To be fair, the UK Government seems to be among the first to have grasped at least part of this dilemma and is driving the development of ‘commercial skills’, to surround the procurement process with improved front-end selection skills and post-award governance and delivery capabilities. This will certainly do much to prevent the continued headlines – but will it be enough? There appear to be at least two other critical questions to answer. One is ‘What are the right measurements of Procurement success?’ and the other is ‘To what extent is the procurement function the best place for embedding commercial and contract skills?’ But before those can be answered, it seems to me that organizations must tackle the fundamental issue of re-designing their acquisition processes to reflect the lifecycle of today’s supply relationships; it is the fragmented nature of these processes and the poor definition of stakeholder engagement and skills that ultimately sits at the root of these crises.

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Failed sourced services arrangements indeed are not limited to the public sector. Many studies have identified troubled contracts in the commercial domain. Based on my experience in managing large sourced services agreements in the financial sector, I believe that, in most cases, the root cause of these failures lies not in the strategy or partner selection. Things go wrong in shaping and managing the contract
When shaping the contract there is little interest for the manageability of the contract. For traditional product Procurement manageability is no issue, but for service Procurement this is critical. The contract needs to align outcome and costs, balance trust and control and facilitate the dynamic nature of service contracts. Often however this is not the case.
After signing many contracts get stuck in the Bermuda triangle of the organization.
Procurement considers their work done. Finance only looks at the business case and the service owner focusses on (not surprisingly) the service. A silo approach failing the integral nature of the contract. It results in misinterpretations, misunderstandings, misalignments, lots of emails, lots of discussions and failed relationships and lost value. We believe that business service owners should be accountable for all aspects of the contract and that they are sufficiently trained and supported with effective methods and tooling.